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Negative gearing is unfair, says economist

06 October 2011 Reporter

James Mitchell

Negative gearing is one of a large number of loopholes and concessions in the tax system that detracts from its fairness and adds to its complexity without doing anything to increase the supply of housing, according to an industry figure.

Speaking at yesterday’s federal government tax summit in Canberra, Grattan Institute economist Saul Eslake told a roomful of government officials, including prime minister Julia Gillard and treasurer Wayne Swan, that the practice of negative gearing transferred $4.5 billion per year from ordinary tax payers to affluent ones.

Speaking to Real Estate Business this morning, Mr Eslake said negative gearing results in a loss of revenue of at least $4.5 billion a year, enabling people who are affluent enough to be able to absorb paying more in interest than they earn in rent, both to defer and to reduce tax.

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“If there was clear evidence that this loss of revenue had a beneficial effect in terms of increasing the supply of housing, particularly housing at affordable rents, then it might be a price worth paying,” Mr Eslake said.

“But since more than 90 per cent of negatively geared investors buy established properties rather than new ones, and since despite Australia being one of the few countries in the world which allows negative gearing in the way that we do, rental vacancy rates are much lower than in countries which don’t allow negative gearing,” he said.

“In my view it is impossible to conclude that negative gearing serves any purpose than to allow wealthily affluent tax payers to defer and reduce tax.”

Mr Eslake’s comments, if taken seriously by the federal government, have serious implications for existing and future property investors in Australia.

Many investors rely on the windfalls of negative gearing, the practice that allows investors to write off losses made on rental properties against other income.

The rule was briefly suspended under the Hawke government, but popular beliefs that the measure caused a surge in rents are unfounded, Mr Eslake said.

“If you look at the evidence from the consumer price index from that period, that’s simply not true,” Mr Eslake said.

“Rents did go up in Sydney and Perth, but that’s because vacancy rates were less than two per cent at that time. In other cities rent inflation either didn’t change or, in Melbourne, went down,” he said.

“If it were true that the abolition of negative gearing would lead to landlords selling their properties on a large scale, and there’s no evidence that they did that in 1986-88 either, then the result would actually be that the price of investment properties would fall, homebuyers would be able to buy them and there wouldn’t be any upward pressure on rental markets, so I don’t think that common assertion has any merit.”

Mr Eslake added that he is supportive of abolishing negative gearing for all investors, not just those who invest in property.